Sunday, March 15, 2009

Fundamentals of the Economy Are Sound -- Really?

During the presidential campaign, Senator John McCain said that the fundamentals of the economy were sound. This sent the media and Obama into orbit. Today and earlier this week, however, President Obama and Christina Romer -- Chair of Obama's Council of Economic Advisors -- basically said the same thing. Jake Tapper's Political Punch blog has more details.Romer, for example said:

"Of course, the fundamentals are sound," Romer said on Meet the Press, "in the sense that the American workers are sound. We have a good capital stock, we have good technology. We know that, temporarily, we're in a mess, right? We have seen huge job loss, we've seen very large falls in GDP. Certainly in the short run, we're in a bad situation."

But Obama beat down McCain as being "out of touch" for making the same comment:

"We just woke up to news of financial disaster, and this morning he said that the fundamentals of the economy are still strong," Obama said on September 15 in Grand Junction, Colo. "Sen. McCain - what economy are you talking about? "What’s more fundamental than the ability to find a job that pays the bills and can raise a family? What’s more fundamental than knowing that your life savings is secure, and that you can retire with dignity? What’s more fundamental than knowing that you’ll have a roof over your head at the end of the day?"

And earlier last week, Obama himself said that:

"[I]f we are keeping focused on all the fundamentally sound aspects of our economy, all the outstanding companies, workers, all the innovation and dynamism in this economy, then we're going to get through this. And I'm very confident about that."

Even Huffington Post, which beat up McCain for saying the fundamentals of the economy were sound last September, has published an article showing the striking similarities between Romer's and McCain's statements. Since the time McCain made his comments, the stock market has plunged, unemployment has soared, foreclosures have climbed to record highs, and GDP is in free fall. But now, the fundamentals of the economy are sound when they were not last Fall. Amazing stuff.

11 comments:

I guess that to a large extent it depends on how you frame the debate. I'm unemployed and trying desperately to keep my house (lack of savings, not too big a loan per se), so my fundamental economy sucks! The local economy is rocky, but companies are still hiring, so I guess that it is fundamentally sound. On the national level, I'd say that, yes, we've taken an enormous uppercut to the jaw of our economy, but that doesn't mean we're down and out.

I think that Obama's right now, just as McCain was last fall. Fundamentally, our economy is sound, if shaky. Yes, foreclosures are high and unemployment has risen. Both are signs of market corrections and corrections hurt (just look at me)! GDP and the stock market are symptoms of something deeper: uncertainty. GDP is driven heavily by investment nowasays, so the two are interconnected. When folks pull their money out of the stock market (though mostly just out of the large financials that dominate Wall Street), it reduces the investment potential of corporations, limiting (or in this case, destroying) their ability to grow.

Where does the uncertainty come from? To a large extent, I believe that it's psychological. Obama put a lot of faith in Geithner and he increasingly seems out of his element (though Summers might be up to the challenge). Seeing the deer-in-headlights on Geithner's face cannot inspire confidence among the investor class that we so desperately need right now.

Given the above, The One has deftly maneuvered himself into the unique position where he is increasingly viewed as a liar, a hypocrite, and an incompetent not only by the Right...but by the Left as well.

Say what you will, but, hey, one really needs to be talented to pull off something like this, n'est-ce pas?

Jason - I really was not trying to argue about the soundness of the economy. Instead, I wanted to show how things have, well, changed since last summer.

As a person who appreciates history, I never really bought all of the dramatic statements about the "end" of the US economic life. Anyone with an even modest knowledge of history knows that economic cycles happen all the time. This is another low point for the US. It exceeds all other downturns since the Great Depression - but the country also emerged from the Great Depression. I do not believe all of the policies have been sound (the stimulus is not a true stimulus), however.

Jason, the point is that Obama's claims then and now are mutually exclusive. If Obama had been complaining last fall about irrational exuberance, it might be possible to square with a statement that the economy is now fundamentally sound, but he wasn't saying that then: he was proclaiming the lousiness of the economy in order to pin it on Bush. Now that the economy is three times lousier, and the difference is being pinned on Obama's bull-in-a-china-shop financial incompetence and wild spending spree, suddenly he discovers the merits of happy-talk.

McCain was right back then, and Obama is right now. Back then, Obama had an interest in painting the situation to be as bad as possible since the problems were mainly (and correctly) being blamed on Republican malfeasance.

In other words, a politician running for office spoke dishonestly in order to make his opposition look as bad as possible. Unethical, but hardly unusual.

Now that Obama is in power and will be held responsible for actually dealing with the problem, his incentives are different.

As for assessing the economy's actual prospects, I think Bernanke (see post above) is a more reliable source than politicials running for office who have an incentive to say whatever they think will get them elected.

The Obama administration deserves a significant amount of the blame for the stock market's plunge and consumer sentiment. They pushed the crisis meme for months as they were ginning up support for their big government expansion. Now that some of the chickens are coming home to roost and Obama's approval rating is starting to slip, they are trying to undo what they just did. The fundamentals of our economy are absolutely the same now as they were last summer when Obama said exactly the opposite he is saying now. We have some real problems from overleveraging that began over thirty years ago, but the fundamental soundness, or unsoundness, is no different now than it was last year. This flip-flop shows just how insincere and manipulative Obama and the Democrats are. They were willing to use fear to manipulate people into voting for them and to support their move to socialize the country.

About Me and the Blog

Professor Darren Hutchinson teaches Constitutional Law, Remedies, Race and the Law, and a Civil Rights Seminar at the University of Florida Levin College of Law. Professor Hutchinson also holds the prestigious Stephen C. O’Connell Chair.
Professor Hutchinson received a B.A. from the University of Pennsylvania and a J.D. from Yale Law School. Before teaching law, Professor Hutchinson practiced commercial litigation at Cleary, Gottlieb, Steen and Hamilton in New York City. He also clerked for the late Honorable Mary Johnson Lowe, a former United States District Judge in the Southern District of New York.
Professor Hutchinson's research has appeared in many prestigious journals including the Cornell Law Review, Washington University Law Review, UCLA Law Review, University of Michigan Journal of Race and Law, and University of Pennsylvania Journal of Constitutional Law.
He has also presented his research at numerous universities, including Yale, Stanford, Columbia, University of Pennsylvania, University of Michigan, University of California at Berkeley, University of Virginia, Cornell, Georgetown, and Boston University.

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